As stated from the outset, I offer the $100,000 portfolio as more of a learning exercise than an experiment in chest pumping. As such, I make several moves intended to illustrate various options and general investing themes, strategies and phenomena.
For instance, in last year's $10,000 portfolio, I stipulated that I had to hold several volatile stocks - Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), Research in Motion (RIMM) and others - through their earnings reports, despite considerable on-paper profits in each. While that risk generally worked out well, it's not something I would have done in real life.
In this article, I review where the $100,000 portfolio stands, as of Friday's close, and introduce a new wrinkle designed to help illustrate several options-related situations.
- Long 200 shares of Amazon.com . Short 2 AMZN May $200 calls ((ITM)). Value: $40,000 (+ $3,096).
- Long 3,000 shares of Pandora (P). Cost basis: $10.03. Value: $26,250 (- $3,840).
- Long 200 Wendy's (WEN) January 2013 $5 calls. Value: $8,000. (- $3,000).
- Short 5000 shares of Sirius XM (SIRI) from $2.28. (+$600).
- Long 200 SIRI January 2013 $2.50 puts. Value: $10,600. (+$200).
- Long 25 Lululemon (LULU) September $75 calls. Value: $25,000 (+ 7,110).
- Cash balance: $893.
- Total Portfolio Value: $111,343.
Now, the new wrinkle. And, again, we'll use Friday's closing prices to calculate everything.
You'll notice that I capped the total value of my 200 AMZN shares at $40,000 even though they're worth much more. That's because I wrote $200 calls against them. If AMZN trades higher than $200 come May option expiration day, it's almost certain I will have my shares called away.
While there's a chance they could get called away prior to expiration, that's not likely. But, for fun, let's assume the shares did get called away. I collect $40,000, bringing the $100,000 portfolio's cash balance to $40,893.
We're going to take things a step further, though. I am unloading every position except the 3,000 shares of P. By closing LULU for a big gain, the SIRI short and put positions for a modest gain and the WEN calls for a sizable loss, I come out ahead with a profit of $4,910.
The proceeds from these sales brings the $100,000 portfolio's cash load to $85,093.
If I went with my instinct and intuition with that load of cash, I would write a couple OTM AMZN puts. With a little bit of market turbulence undoubtedly ahead, I think I could pick AMZN up on a pullback. Once the dust settles, I fully expect AMZN to retest old highs, sustain them and set new highs ahead of its next earnings report.
I do not have nearly the same amount of confidence in AAPL performing all that well into its next report. I realize, however, that this view represents minority sentiment. As such, it's time to go all counterintuitive on you.
As such, I am using $56,500 worth of this cash to do something an AAPL bull might do right about now. I am selling an AAPL May $565 put and collecting $12.00 ($1,200). It's this simple - if AAPL closes below $565 at expiration (putting that contract into ITM territory), I have to buy 100 shares of AAPL at $565 each. That will require $56,500.
Because of the $12.00 premium I collect, however, it brings my effective purchase price down to $553. The trade does not become a money loser until AAPL trades below $553.
That move leaves me with $29,793 to spend ($85,093 - $56,500 on reserve + $1,200 in premium income from the short put).
With that dough, I am doing what a true AAPL permabull would do.
Bartender, hit me with 3 AAPL October $530 calls at $69.75 apiece. It costs me $20,925 to get into that position and leaves me with $8,868.
What a true AAPL permabull and fanboy do with that leftover cash? Spend more of it on AAPL calls of course. But, I do not have much cash to spend so let's go for the gold.
Where can I find lots of open interest in October? It's terrifying, but the $700 strike leads the way at over 5,000. At $11.35 each, I can buy 7 AAPL October $700 calls for a total debit of $7,945. That brings the $100,000 portfolio's cash balance down to $923.
Let's go nuts with that pocket change and bet on NFLX to go into full implosion mode later in the year. I'll take 2 NFLX January 2013 $47.50 puts for $4.40 each. That's an outlay of $880, knocking the cash balance to a measly $43.
I do not want to say anything else on the subject until we get some sort of word from Netflix on this.
In the meantime, I will update the portfolio by the end of the week and provide some more color on how my various options positions could play themselves out.